Earthquake insurance Australia & NZL

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Insurance and exposure of earthquakes in Australia and New Zealand

What if the unexpected were to happen? It will happen. We know an earthquake will hit one of the Australian cities. The only questions that remain are: when and how severe?

So far, we have not experienced a major earthquake catastrophe in Australia. This is consistent with our expectation of a low to moderate seismicity. For return periods of several hundred years, this is different. Loss estimates are very high, with considerable uncertainties. They increase sharply for higher return periods. This makes risk management difficult for the insurance industry.

In Japan, the insurance cover is strictly limited and extreme events are expected, so that potential losses are not likely to be significantly underestimated. In Australia a really unpleasant wake-up call by an extreme event is much more likely. This is because earthquake insurance penetration in Australia is generally very high (above 80%), and risks are covered on a full-value basis with very small deductibles.
Most of the exposure in Australia is concentrated in the big cities. The value concentration is enormous. If an earthquake strikes one of the Australian cities the exposure affected by high ground motions will be factors higher than in Christchurch – and the major part of any earthquake loss will be borne by the insurance industry.

Challenges for claims handling

While the local insurance industry has some experience with the handling of mass claims due to cyclones, hailstorms and floods, the earthquake engineering community is not very strong. So the handling of earthquake losses would also be a great challenge for insurers – despite the steep learning curve insurers managed to stay on while dealing with the Christchurch earthquakes.

The experience from Christchurch demonstrates that claims handling and reconstruction would be a complex and long-lasting process. Such unexpected complexities arise after nearly every major natural catastrophe event worldwide. Many of the challenges following the Christchurch events were associated with the structure of the market – the Earthquake Commission (EQC) in particular. In addition, legal aspects slowed down claims handling.

Prepared for the first big one with Munich Re

Australia´s largest earthquake, with a magnitude of 7.2, occurred in 1941 in Western Australia – far away from any of the bigger cities. The earthquakes in Christchurch have shown us that even moderate earthquakes can cause huge losses for the insurance industry. Such an earthquake – but with significantly higher losses – is a very realistic scenario for Australia. The vulnerable highly concentrated building stock has the potential for extreme losses. A repetition of the 1954 Adelaide earthquake (magnitude 5.7) would result today in multi-billion insured losses. A bigger event closer to Adelaide could cause a loss costing tens of billions.

Dr. Astrid Zwick und Stefan Lämmle, Munich Re.

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